SIPP investment due diligence – how far do you have to go?

Following the Pensions Ombudsman decision in Mr N v Stadia Trustees, we consider the level of due diligence expected of SIPP operators by the FCA.

04 July 2016

The standard of due diligence checks on SIPP investments is a live issue. Since 2009, the FCA has conducted three reviews of and issued guidance for SIPP operators.

In May, the Pensions Ombudsman scrutinised the procedures followed by one SIPP operator in the case Mr N v Stadia Trustees. This Ombudsman's decision serves as a helpful reminder of the level of due diligence expected. This article outlines the case and sets out key points from FCA guidance on appropriate due diligence.

The facts in brief

In 2012, Mr N invested in a 'high risk' unregulated collective investment scheme (UCIS) through a SIPP held with Stadia Trustees, a SIPP operator.

The transaction was member-directed arrangement. Mr N signed a standard declaration confirming that 'the transfer of my occupational pension scheme(s) is to be conducted on an execution only basis. I have not sought or received independent financial advice'. As a result he did not have recourse to the Financial Ombudsman or Financial Services Compensation Scheme. Mr N also confirmed he understood the investment risks associated with the purchase.

Following completion of a risk assessment form, Stadia suggested that Mr N invested in a more diverse investment portfolio and flagged that the investment chosen may not be appropriate. Stadia also warned that its due diligence was a paper exercise to confirm only that the investment existed and seemed to provide the services described. Stadia notified Mr N that it would not be responsible for the financial propriety or performance of the investments.

The complaint

The investment was illegal and failed. Mr N complained that had Stadia undertaken the appropriate level of due diligence, Stadia would not have allowed him to invest. Mr N relied upon the guidance issued by the FCA in 2013.

Ombudsman's decision: The Ombudsman dismissed the complaint. In doing so, he considered the role of Stadia, specifically whether it had acted as a SIPP trustee or only as a SIPP administrator. As the arrangement was member-directed with Stadia having no discretion over the investment choices, the Ombudsman determined that Mr N could not judge Stadia against the higher standard of care expected from a SIPP trustee when making investment choices. Stadia had only taken on the role as SIPP administrator, as such, Stadia's duty was limited to considering whether or not an investment was permitted by HMRC. Stadia had fulfilled that duty. Further Mr N was wrong to rely upon the 2013 guidance as it had not been published at the time the investment was made.

Key points for you

This case serves as a helpful reminder of the due diligence requirements on SIPP operators. Below are some key points:

  • Be clear whether or not it is a member directed arrangement with a SIPP administrator. If the SIPP operator acts as trustee as well as administrator, there is a higher duty of care owed to the member when making investment choices.
  • Provide clear warnings to members of investment risks and limits of any due diligence procedures.
  • Have appropriate due diligence procedures in place. It is no longer sufficient to simply check that investments exist. The FCA guidance for SIPP operators issued in 2013 has raised the bar. Due diligence checks should cover the following key areas:
    • the nature of the investment
    • whether the investment is genuine or not
    • whether the investment assets are safe eg legal enforceable contracts
    • whether the investment can be independently valued
    • whether the investment is impaired eg investment providers are creditworthy.

Additional care should be taken when dealing with UCIS. The FCA recommends that SIPP operators should:

  • put in place enhanced due diligence procedures
  • set KPIs linked to the sale of UCIS to monitor the business they are conducting
  • independently verify third-party due diligence used
  • regularly review any due diligence on a UCIS.

If you would like any further information or advice on pensions regulatory matters, please do speak to your usual contact at Burges Salmon or speak to Leo Robinson or Katherine King.

Key contact

Michael Hayles

Michael Hayles Partner

  • Pensions
  • Public Sector Pension Schemes
  • Financial Services

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